Use of home for daycare

[appelman]

Client has been running a daycare business, typically with six children at a time. Their small (1050 sq ft) house has almost 50% of its area set aside exclusively for the daycare use. 3/4 of the rest is used non-exclusively for the daycare, making a total usage around 60%.

The business is running down, and during the final 7 months (6 in one year and one in the next) they had only one child. Should they be claiming the full 60% usage for this period. It seems excessive and unreasonable to me -- one child (an infant) cannot really make use of 60% of the house. But if not the 60%, how much?

The main business-in-home benefit is the mortgage interest and real estate tax, which would have the effect of eliminating SE tax and creating a 5-digit NOL.

My client would obviously like the deduction, and if I demur on giving it to him, I would like something to back me up. Anybody have any ideas?

[oceanlovin'ea]

I have clients who operate a daycare in their home. These people do have a portion of their homes set up and use the space for the children.

You said during the last 7 months they only had one child. So I am assuming that you are doing a tax return for 2010 during which they had several children for 6 months and then 1 for the rest of the year. I am really going back and forth as to my answer. If the kitchen is part of the non exclusive use portion of the house, she is still using the kitchen to prepare bottles and food for that infant and perhaps feeding the child in the kitchen. Yes, she isn't using it as much but I have grandchildren and I use my kitchen more when they are at my house than when they aren't.

So I think I would take the whole deduction for 2010 and for 2011 (1 month) I would just use the exclusive use part for 1/12 of the deductions. Just my opinion and I am sure others will have different thoughts which I will enjoy hearing.

I think it is redleafinstitute.com that has material on daycare guidelines too.

Linda, EA

[S T]

Form 8829

There is line 4 on form 8829 and line 5 - Maybe you could calculate the hours and then see what the business percentage is for the Childcare/daycare facility. (Part I)

It is based on hours - not by number of children in daycare.

Just a thought, and someone else will probably chime in with their thoughts.

Sandy

[spanel]

There is line 4 on form 8829 and line 5 - Maybe you could calculate the hours and then see what the business percentage is for the Childcare/daycare facility. (Part I)

It is based on hours - not by number of children in daycare.

Just a thought, and someone else will probably chime in with their thoughts.

Sandy

Agreed... that section should be filled out.

Chris

[oceanlovin'ea]

I agree about the part of the form. I was assuming that the form was where Appleman came up with the percentages.

Linda, EA

[appelman]

The issue lies beyond the calculation area of the form.

I've about come to the conclusion that the exclusive use portion should be independent of the number of children. However, some sort of proration may be in order for the "regular but not exclusive" use portion. For example, an examiner could reasonably baulk at a time-only-based allocation of two bedrooms, when there was only one child! I did find the audit guide to home daycare which sheds a little light on the question.

[S T]

I would agree - but might become complicated in a "mixed year"

If she had 6-children for a certain period of time with exclusive or regular use then dropped to one child the last part or portion of the year -

You might have to re-allocate the percentage of the home being used. One or two bedrooms could make a difference.

So the percentage from 60% might drop to 45-50% depending on sq ftg. and use.

Maybe complete two separate 8829 forms for the changeover.???

Sandy